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Wealth Is Gold The Safest Investment In A Volatile Market?

Is Gold The Safest Investment In A Volatile Market?

Is Gold The Safest Investment In A Volatile Market?
Photo: Dan Forbes/Trunk Archive
By Richard Lord
May 06, 2021
In times of economic uncertainty and fragile markets, many view gold as a safe bet

It is an investment trend as old as the hills from which the shiny stuff is mined: in times of economic uncertainty, people turn to gold. As a store of value with limited practical use, gold is a natural hedge against risk, so it understandably proved popular in 2020. Whether it’s a good long-term bet or not, though, is a complicated question, largely revolving around how much faith you have in the prevailing economic system.

The price of gold rose fast throughout 2020, gaining almost a third in value before peaking in the summer and falling again since August. Carsten Menke, Zurich-based head of next generation research for Bank Julius Baer, describes 2020 as the “most exciting year ever in the gold market”, but points out that the price was already rising throughout 2019.

“That was very much related to the expectation that interest rates had peaked and the US economy would slow down, likely facing a recession over the course of 2020. While that recession happened, it was for very different reasons.”

At the start of the coronavirus crisis, the price dropped sharply as investors were forced to quickly liquidate their assets, but it didn’t last long.

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Photo: Getty Images
Photo: Getty Images

“Then rational behaviour set in: we are in the worst economic downturn since World War Two, and we don’t know when it’s going to end, so we need to protect our investments,” says Menke.

Beyond the short-term crisis, he adds, people are also looking at gold as a solid longer-term hedge, given likely higher government debt levels as a result of stimulus spending. Safe-haven demand for gold is already falling, though, and if conditions ease and the market recovers, as is widely expected, gold prices should continue to fall—but, according to Menke, not that far.

The pandemic premium on gold prices “has increasingly disappeared. The gold market seems to be pricing in the recovery scenario.” He expects the price to settle at somewhere between US$1,600 and $1,700 for the foreseeable future. “People are willing to hold a little more gold in their portfolios than they were before the pandemic. I don’t think we’ll quite see it return to pre-pandemic levels.”

Gold’s role as the ultimate hedge will see its price surge again if there’s another global catastrophe. That could be anything, from another pandemic to an economic shock. As Menke suggests, the best-case scenario for gold’s price would be if people were to lose faith in the US dollar as the world’s reserve currency—not an imminent prospect just yet.

Photo: Getty Images
Photo: Getty Images

Raising the Bar

In 2011, a long bull run on precious metals peaked with gold at over US$1,800 per ounce.

It dropped close to $1,000 by 2016.

Prices started rising in late 2018, reaching about $1,600 when the pandemic hit.

The price of gold soared over $2,000 in August, before dropping to its current level of about $1,700.

The price of the other most traded precious metal, silver, had been dropping consistently for nine years before the pandemic struck; since then it’s risen from just under $12 to over $25.

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